BUSI2093 - Introduction Managerial Finance
Chapter 14, Problem 9
Financial Ratios - Liquidity
Required Data
Current Assets
Current Liabilities
Inventories
Cash
$
$
$
$
2011
1,630,200
1,857,200
587,500
191,000
$
$
$
$
2010
1,504,700
1,787,700
563,600
188,900
Current Ratio:
Current Ratio = current assets / current liabilities
Current Ratio =
0.8778
0.8417
$
$
$
$
Change
125,500
69,500
23,900
2,100
0.0361
Quick Ratio:
Quick Ratio = (current assets - inventories) / current liabilities
Quick Ratio =
0.5614
0.5264
0.0350
Cash Ratio:
Cash Ratio = cash / current liabilities
Cash Ratio =
0.1028
0.1057
-0.0028
Liquidity ratios measure a company's ability to meet its short term obligations in a timely fashion (Brooks
2013; pg 429)
The current, quick and cash ratios have resulted in a number less than 1, meaning that the current assets are not enough to cover the company's current liabilities. This can be an issue should the creditors demand repayment all at once. The year over year change of these two ratio's have slightly improved, however to investors these results would still be concerning.
References
Brooks, Raymond M. (2013). Financial management: Core concepts, (2nd ed). NJ: Prentice Hall
BUSI2093 - Introduction Managerial Finance
Chapter 14, Problem 10
Financial Ratios - Financial Leverage
Financial leverage ratios measure a company's ability to meet its long-term debt obligations. It helps answer the question, Can normal operations cover the interest expense from debt, or will additional capital be needed to satisfy the debt obligation? . (Brooks 2013; pg 431)
Required Data
Total Assets
Total Liabilities
Total Equity
EBIT
Interest Expense
Depreciation
In 2011, for every dollar of assets, the Tyler Toys owes $0.82, vs. only $0.78 a year ago. An increase in this ratio could be looked at negatively by the managers and shareholders.
One would need to look at the reason for the increase in debt from a year ago to see if it is justified. For instance was the increased debt due to long term financing for an expansion of the business or due to increased purchase of inventory that isn't selling?
Times Interest Earned Ratio:
Times Interest Earned Ratio = EBIT / interest expense
=
8.5315
8.3676
0.1639
In 2011, Tyler Toys EBIT could cover its interest obligation 8.5 times which was slightly better than the year before at 8.4 times.
The year over year change wouldn't signal any concern with management and the shareholders, however should be compared against the companys' aspirations to ensure it is aligned with meeting its strategies.
Cash Coverage Ratio:
Cash Coverage Ratio = (EBIT + depreciation) / interest expense)
=
12.5287
12.5047
0.0240
In 2011, Tyler Toys can generate cash from its normal operations 12.5 times which roughly constant from the year before. Whether this is good or bad will depend on the strategy of the company. From a shareholder perspective I would want to see the company using its cash to expand or grow its EBIT.
References
Brooks, Raymond M. (2013). Financial management: Core concepts, (2nd ed). NJ: Prentice Hall
BUSI2093 - Introduction Managerial Finance
Chapter 14, Problem 11
Financial Ratios - Asset Management
Asset management ratios measures how efficient a compan y uses its assets to generate revenue or how much cash is tied up in assets like inventory or receivables. (Brooks 2013; pg 432)
Required Data
Total Assets
COGS
Inventory
Sales
Accounts Receivable
